Wall Street Week with Louis Rukeyser; 1830; What the Bush Presidency Means for Business

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Wall Street Week With Louis Rukeyser brought to you by a public television station by CSX the company that puts things in motion transportation energy properties and technology. And by Prudential Bates securities the investment firm with rock solid resources and market wise thinking in the business of making money. So deuced Friday Jan. 20 tonight special guests are Timothy G Dolton Jr. President Dillon Read capital Henry be divvied managing director Kleinwort Benson international investments and James C. Miller the third distinguished fellow citizens for a Sound Economy.

That even I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well I won't have Ronald Reagan to beat up on anymore. And boy are they relieved. Every time the Washington establishment told us what adultery was. He seemed to go up another couple of points in the polls. Could it be that the wily old cowboy knew something they didn't. How could it possibly be so and so now tonight we turn from the Santa Barbara ranch in the stories of Rockne. To the Connecticut aristocrat who went into what he learned to call the oil bidness to chew on pork rinds and to bear the slings and arrows of alleged wimped him until he and his spectacularly down to earth wife could have the last and best of laughs in the Oval Office. But if the images of America changed today the problems did not. And so tonight we will have a special half hour devoted to what may truly lie ahead for you and your money.

Under the nation's forty first president. Now that we have decided as America's first electors did to let George do it what chance does he have to cut the deficit hold the line on taxes and uplift those who failed to participate in the Reagan miracle. Three top guests with widely differing perspectives from Washington from Wall Street and from abroad are here to give us their insights and their predictions. Meanwhile in the atmosphere of goodwill appropriate to all new presidencies the worlds of finance and economics play their own round of ruffles and flourishes. Inflation ended the year not an inch higher than it had been in 1987 and industrial production for 1998 the year after the melodramatic Wall Street crash actually scored its strongest gain in four years. As for the stock market it was willing to ignore even slightly unpleasant news such as

a larger than expected monthly trade deficit to score a succession of post crash highs as a sort of dollar green carpet for Bush's arrival. Not all was euphoric of course. Thoughts that interest rates might be rising a hair helped the dollar because the recently strong bond market to ease off a tad. And those technical toads began selling every time the Dow neared its last close before the crash so that the blue chip index never quite matched it and some were predicting that it would have to back off further before finally writing the last of the gloom stars. But as the Dow Jones Industrial Average indicates the index did come within a mere eight points of where it stood just before the crash and has now set nine post-crash homicides this year alone. As of this week made it three out of three in 1989 rising another nine points to close at twenty to thirty five point three six. Up more than 66 points for the year.

The broader market averages have been on an even more extended bin with the New York composite up nine weeks in a row. And the over-the-counter market making it eight straight. As for our elves their technical market index slipped one notch to total neutrality. Keeping the little fellows safely within the neutral zone for nine of the past 10 weeks. And I certainly hope that is giving you useful guidance. Now before we meet tonight's special guest let's take a look at some of the economic highlights of the Reagan legacy. How does the economy that Jimmy Carter passed on to Ronald Reagan compare with the one that Reagan now hands to George Bush. Economic growth had come to a standstill when Reagan became president. Real output was in fact down by a tenth of one percent in the preceding four quarters. In the latest four quarters reported growth was an above average 3.7 percent but if output wasn't rising eight years ago prices certainly were. The Consumer Price Index for the last 12

months of the Carter era was up by twelve point four percent. The latest 12 months saw prices rising only about a third as fast 4.4 percent unemployment which stood at seven point four percent when Reagan took office rose sharply in his early years but is now down near a 14 year low at 5.3 percent. Savers may have benefited from the high interest rates of the Carter period but borrowers certainly didn't enjoy the 20 percent prime rate that the Georgian bequeath. That rate is now 10 and a half percent. As for the stock market at noon on January 20th 1981 the Dow Jones Industrial Average stood at nine hundred seventy one point eighty four. At noon today the Dow was well over twice as high at twenty to forty one point zero seven. But if most of the economic news plainly is better part of the purchase price has been a heavy increase in debt. The seemingly exorbitant sixty eight billion dollar budget deficit in fiscal 1980 was

dwarfed by last year's one hundred fifty five billion and the nation's trade deficit which would reach thirty six point four billion dollars in 1980 was nearly four times as high at one hundred thirty eight billion. In 1988 most mind boggling of all during the presidency of a man who had preached balanced budgets for a generation. The national debt nearly tripled from nine hundred twenty seven billion dollars when Jimmy Carter went home to Plains to 2.6 trillion. As Ronald Reagan heads into the western sunset. Is this a legacy on which the new president can effectively build. Or is it as the political opposition kept telling us just a ticking time bomb of trouble ahead. With me tonight are three men with special insights into those questions. James C. Miller the third has been on the firing line of the federal budget. He served nearly eight years in the Reagan administration including three as director of the Office of Management and Budget. Before leaving to join citizens for a Sound Economy last October Timothy Dalton

Jr. is a powerful member of the Wall Street establishment. Founder and president of Dillon Read capital which currently manages 2.6 billion dollars for institutional investors and we deem as a distinguished European investor based in London for Kleinwort Benson he manages its transatlantic Growth Fund which is the second oldest international stock fund trade in the US. Gentlemen if you all could give one single piece of economic advice to George Bush as he begins his presidency what would that advice be. I would say steady as you go avoid protectionist trade legislation avoid legislation that imposes costs on the business community generally avoid a tax increase. But most of all perhaps maintain very friendly relations with the Federal Reserve Board. Tim I would say Lou put forth a credible plan to eliminate or significantly reduce the budget deficit in a reasonable period of time.

And I think that he can work with a Democrat Congress to deal with some of the problems the team is making. Well let's focus on the deficit because it was the one that Tim focused on. Jim you ran the budget for three years. Congress is a useful whipping boy possibly a deserving whipping boy. But in your last year in office in the sixth year of an economic recovery you submitted a budget with a deficit well over 100 billion dollars and it's true that if you can Ronald Reagan have done better Couldn't you have done that. Well let me say if you have start with a very high deficit you need to get it over down gradually. You try to eliminate it overnight I think it would very be very discombobulating to the economy we've made a lot of progress. The deficit in 1906 was two hundred twenty one billion dollars and it came down to one hundred fifty billion dollars for fiscal year 1997. Then we had these bipartisan budget negotiations with Congress and it stalled the progress stalled in fact the deficit went up a little bit last year and it's predicted to go up a little bit more this coming year. George Bush has to revive that and to push down the deficit. And I think

the key to doing that is to get Congress to restrain spending rather than to raise taxes. After all even in this budget that the president set up he has 15 billion dollars increase in spending and he has 84 billion increase in revenues for the. One of your predecessors David Stockman. You seem to be astonished by the fact this politics in the budget process. This didn't astonish you you know what Congress is out there. The people have elected virtually the same Congress we had before. Where is spending to be restrained. Well what we have to keep in mind is that within the Beltway of Washington you have this you have this newspeak that goes on that is current services you talk about cutting spending we cut spending from something that is way above what is really the spending of last year. Most people think in terms of cutting spending and their own personal budgets as spending less next year than this year in Washington thats not the way its done. Again this is the budget that Reagan set up incorporates 15 billion dollar increase in total spending divided approximately

equal equally between defense and domestic appropriated accounts and all of these entitlement programs it is an increase spending budget. George Bush will have to probably change priorities within that spending level. But if he is going to balance the budget he's going to get the Gramm-Rudman Hollings targets met and balance the budget in 1993. I think he's going to have to keep spending pretty much at the level that that Ronald Reagan proposed in his budget. Jim you're out of office now. You can speak the truth without fear of anybody hitting on the rest. So just whisper in our ears just a few of us here tonight. Can you really get that spending down if you don't attack defense and Social Security. Well I think it's going to be difficult to do that I don't think the defense budget will actually realize the increases that are included in Ronald Reagan's budget. And we must I think take a careful look at Social Security I know this is politically dynamite. No politician in their right mind is going to take it on. But we've got to bear in mind that the social that the that the elderly are no longer the poor class that they once were. And also

one thing that has to be realized is that the Social Security benefits that people receive are not really what they paid in it's a massive distribution intergenerational distribution I think we ought to treat Social Security as we do an ordinary pension plan and probably tax it the same way but what really concerns me is that we have this massive social security surplus building up and it gives false signals as to what the level of the deficit really is and we're going to since the trustees have to invest in government securities we get out there to your 20 30 when we have to start paying people back. There's not going to be anything in the box but claims on current generations of working people and we may have some real intergenerational strife at that point. Tim you introduced us have it with deficit are you satisfied with what Jim said. Well I I think that the financial community Lou has a significant amount of skepticism regarding the ability of the president working with Congress to make the reductions and in these areas

I personally share that view. And I I also. Look at other areas that President Bush as follows in his campaign the kinder gentler policies that he talked about which are euphemism for spending in other areas of course. I also look at the need to rebuild the infrastructure which will also take take more spending at the same time as Jim properly points out that we need to rein in spending in other areas. I think it's going to be very difficult to solve the problem solely by by cutting spending. Does that mean that unlike him you would raise taxes. I find it difficult to believe that we can resolve the budget problem over a period of time without raising taxes. Does that mean income taxes taxes of some sort. You know doesn't have to be income taxes.

Now the record of recent history is that when we raise taxes we don't lower the deficit. They just spend more in Washington we slow down the economy a little why why should that not happen next time it might happen again. What else are you worried about this economy. I'm particularly worried about some imbalances that are kind of lurking beneath the surface namely an imbalance between our savings and our investment in the US private savings in this country have dropped enormously in the in this decade. NET private savings averaged around 8 percent of GNP in the 1970s and currently net private savings is lurking around 3 percent. Consequently in order to finance this deficit finance private investment we of course have had to attract capital from abroad. Now this is fine as long as the foreign private investors are willing

to meet meet these needs and and willingly buy the financial assets in the US. However at any given time foreigners can become concerned about having to buy too much in the way of U.S. assets. And at any given time they could demand a higher rate of interest or a more favorable exchange rate. So our markets stay vulnerable to the whims of foreign investors as long as we have this imbalance. Demba year ago you were pretty bearish. You said the Dow could be down to twelve hundred nineteen eighty eight. That was just a thousand point there as it turned out. Well that could have I suppose it didn't. What do you think's ahead now. Well we continue to be cautious. We have a fair amount of cash in our clients portfolios Lou. And the reasons are twofold. We expect interest rates in the U.S. to continue heading higher

for two reasons. We think the domestic economy is pretty strong stronger than the rate of growth. Alan Greenspan says he's comfortable with. So we expect more tightening as the over the course of at least the first half of the year. The other reason being international We think that international investors will refocus on some of these problems we're discussing the large ship budget deficit and the large current account deficit. And consequently to attract those funds we think that rates will have to go higher. Second reason we're concerned is a level of valuation of equities we think the stock market as a whole is roughly 15 percent overvalued and we tend to give credit as co-host and I because he set you up so nicely kept talking about the importance of foreign investors to our economy. How long are you going to keep on buying our bonds and bailing us out in our deficit spending. Well I think it slowed down in the last three six months and

I refer to my opening remark I think they're going to wait and see how the president gets on with Congress in dealing with these deficits. The view from abroad is that the U.S. is living beyond its means. Action is needed. The view was expressed earlier that nothing can be done quickly and a slow steady solution to the deficit needs to take place. You know foreign exchange dealers need to make a buck on the hour by the hour. And I hope they'll wait until the deficit comes down to more sensible proportions. In his farewell address President Reagan said that European leaders thought more highly of America now that they talked about the American miracle. What is the image of America in Europe today. I think the view you've just expressed certainly is true in terms of foreign policy.

I'm not sure that's necessarily quite correct on the economic front. Well that sounds like a polite no. What grade would you give the president in economic affairs. I suppose I'd give him B minus what we do right what we do wrong in your view. Well I mean he has overseen the longest post-war expansion that we've seen. Unemployment has come down sharply. Inflation has been kept under control. The flip side unfortunately has been that he's created both the current account deficit and a budget deficit. What's the image of Bush. I think there's a lot of respect for George Bush. Clearly it's too early to attest to his leadership qualities but the team that he has picked in the economic and financial arena. I think the international community are quite impressed by their abilities and pragmatism in dealing with the problems.

Jim you referred earlier to the necessity to cozy up to the Federal Reserve Board to get along as well as a couple ever could. What is your perspective on Alan Greenspan and on interest rates in this country. Well I mean I think he's done a very fine job and the other members of the board have as well. Interest rates I tend to disagree I think that perhaps interest rates may come back down. It seemed to me in the spring of the year we were running along at a point where aggregate demand was beginning to run aggregate supply and interest rate pressures were there but that slacked off a bit we still have very low unemployment rates but that pressure is not there. If there is progress made on the deficit perception that the Congress will work with the president to bring the deficit down I think we'll see some squeezing of real interest rates. And I think perhaps interest rates overall nominal interest rates may come down just a bit maybe slow to come down just a bit. Probably the interest rate assumptions that are contained in President Reagan's budget are a bit optimistic but they may not come down that much but maybe come

down a little bit. There are two prevailing assumptions in Washington today and they can flip. One is that this is the theme of continuity that this is just the Reagan administration in the third term. The second is that this is a president who knows how to work with Congress that he will be much more of a compromise which you think is more correct. Well I think there's a can there. There is a continuity. I think George Bush can work with Congress but remember Ronald Reagan early on in his administration worked very closely with Congress as well. There tends to be an alienation between a president and a Congress. As things go on I mean there was an alienation between Jimmy Carter and the Congress between Richard Nixon and the Congress between Believe it or not Lyndon Johnson and the Congress. I think this window of opportunity that now exists is the one that we ought to take advantage of. What should he do and what should he do fast. I think he should meet with the leadership of Congress I think you should gently but firmly indicate that he will not accept a tax increase but that he wants desperately to solve the deficit

problem. Members of Congress I think are taken by a recent CBO study which suggests that at least for this year the problem in getting the deficit down to the Gramm-Rudman Hollings target of 100 billion dollars may not be so difficult as once thought and I suspect that Congress may give him a chance to see if you could reduce the deficit without raising taxes. Do we worry too much about the deficit yesterday. No it's not yesterday's problem it's today's problem it's a problem for our grandchildren. We must solve it I think and work hard on it. The real key though is what kind of resources are we going to take out of the private sector and to the government sector. And that has more to do with spending than it does with the deficit percent. Tim you've told us you're cautious on the financial markets. Where are you put your money these days. Well we we still have an exposure in equities and we do see values in equities approximately 55 or 60 percent of our equity portfolios are invested in equities Lou. The other 40 percent or

so is in cash as I mentioned earlier. We do expect rates to go up in the short run so we really haven't extended maturities but someone taken a very long view I think probably could extend maturities and he's going to perform better under Bush than the Reagan. Just looking at numbers I would say no under Reagan of course we had a bull market where stocks have returned something in the high teens on an annual rate. Logic would have it that it's going to be very difficult to duplicate that. And that has nothing to do with Bush or Reagan. How much influence on all these pub we're talking about does the president have. Like the president it could have a substantial influence on the problems. I happen to think that the economic problems we have are real and that we need a distinct change in policy to address them. The Reagan

administration had some basic tenets that it set out to accomplish and it did. Unfortunately there's been a cost to it and I think that we do need a policy reversal to resolve these problems or the reverse will be in higher taxes. I thought as I mentioned before I think that it's going to be difficult to solve the budget problem without raising tax what else what is what are the policy changes that you want. Well going back to what I said earlier about the imbalance between savings and investment. I think we need policies in the US to to encourage a higher savings rate. Give us a policy. A consumption based tax. The flip side of savings is consuming less. You're not a candidate for Congress as you know. Definitely think we might get a never. Never think we might get such a tax. I have no idea. Let me let me turn to consumption taxes are much more prevalent in Europe. You think we need more

here. Yes I mean from a European perspective. A gasoline tax makes a lot of sense I think. The tax on gasoline here is about 29 cents a gallon in Europe is close to $3 so that that would solve also some of the overseas trade imbalance as America imports too much oil. And one way of curbing the model would be to raise taxes it would have a beneficial effect both on the budget balance and on the trade balance. We're nearly out of time Henry. When in 1992 when George Bush be running for a second term Europe becomes one economic entity. What should we do to prepare for that. Well American companies are establishing footholds in Europe. The barriers are coming down. It's going to provide a wonderful opportunity for companies to expand internationally.

You think it could be a good thing for the U.S.. Yes I think it will be. Well that's that's the most positive note we've had tonight and I think could be a good one of which to stop. I want to thank my guest James Miller Demme of the Dalton I mean to beam for being with me tonight. I hope you'll join me next week for two different events. First is our usual weekly get together and I guess them will be the number one star of mutual fund investing for the past decade. Peter Lynch of Fidelity Magellan and second earlier in the week in many places but do check your own local station for when it's going to run it a special one hour program full of facts figures and fascinating guests. Call Louis Rukeyser is 1089 Money Guide. It should be a lot of fun and I assure you that you will be doubly welcome at these two events. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Goodnight and hello to the TV. Screen which

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